China’s grip on rare earths market looks fragile

April 12, 2012 (Source: Trust.org) — China’s grip on the rare earths market is more fragile than it first appears. The minerals’ high prices are vulnerable too.

Establishing a new industry lobbying group is the latest twist in Beijing’s drive to shut dirty smelters. That may support prices near term, but miners elsewhere will be better placed as a smaller number of Chinese producers are held to higher environmental standards. As new mines come online outside the Middle Kingdom, greater competition should bring prices down.

China’s trading partners may be tempted to see its latest crackdown as a smokescreen for protectionism. Beijing has used concerns about the industry’s environmental side-effects to justify policies including strict export controls that arguably give domestic manufacturers an unfair advantage. But mining the silvery metals is a notorious source of toxic waste. Beijing has a legitimate reason to want to clean up production.

Lax environmental standards explain how China the country came to dominate the industry. Its miners kept expanding in the 1990s even as toxic waste concerns, and depressed prices, forced Western producers out of the business.

Now Chinese policymakers are much less tolerant of big polluters than they were a decade or two ago. Ultimately, tighter environmental controls in China give cause for celebration. Alongside the substantial health benefits, higher standards make it harder for Chinese miners to undercut their competitors. The result should be a more balanced long-term supply of an economically and strategically important resource.

Higher global prices have already enticed Western producers back into the business. Molycorp is ramping up production at California’s Mountain Pass mine, once the world’s biggest source of rare earths. Lynas, an Australian miner, is putting the finishing touches on a big new processing facility in Malaysia.

If Lynas can overcome some last-minute licensing hurdles, the projects together have the potential to add up to 30,000 tonnes per year of production, according to UBS. That’s roughly equal to China’s 2011 export target. With other new projects on the drawing board in Canada and Australia, Roskill, a metals consultancy, expects China’s share of global production to fall from 94 percent last year to just over 70 percent by 2015. That should drive today’s high prices down.

CONTEXT NEWS

– China set up a rare earth industry association on April 8, state media reported.

– The Asian giant accounts for more than 90 percent of global production of rare earth metals, used in products ranging from smartphones to sensitive military hardware and wind turbines.

– According to Reuters reports the more prized rare earths are trading at more than six times their 2009 prices and more than double domestic Chinese prices.

– The United States, European Union and Japan last month complained to the World Trade Organization about China’s restrictions on rare earth exports. Beijing says the curbs are necessary to preserve supplies and manage the environmental impact of rare earth mining.

– On April 9, the Western hemisphere’s only rare earths miner raised its estimate of reserves contained in a California mine, which was once the world’s biggest source of the metals. U.S.-based Molycorp said its Mountain Pass mine contained an estimated 2.94 billion pounds of rare earth oxide, compared with a previous estimate of 2.24 billion pounds – about 11 times today’s global annual demand.